Stated Income Loans Good or Bad for Society?
The stated income loans program is an alternative method for analyzing loan prospects that asks the borrower to state their income for purposes of repayment, but the bank doesn’t put the resources into validating this income. The advantage for a bank is it speeds up the application process. The advantage for the borrower is they can borrow more if their income doesn’t match standard methods like a routine job.
Many opponents of this style of loaning call it the “liar” loan because they believe the only people who would use this method are people who can’t actually afford to borrow the money in the first place. Banks who like the stated income loan counter this point saying if everyone they loaned money to couldn’t afford it they would never make the money required to justify making loans. They would eventually lose too much money and would be forced to stop.
Stated Income Home Loans
The stated income mortgage loans are really the place where the government and news took notice of stated income loans in general. The subprime lenders are accused of offering stated income in order to broaden their lending base. Then they packaged the mortgages together and sold them as safer traditional mortgages understating the potential risk rates. Normal investors bought these packages believing they were more traditional mortgages so the risk premium wasn’t as large. The subprime lenders could vanish and create a new business quickly if there was too much heat and start making money all over again.
Stated Income Refinance Loans
Once the subprime lending was beat down in the court of public opinion the new focus has been on refinance loans. Stated income loans have been offered to capture a portion of the wave of people looking to refinance before interest rates rise again. There advantage to stated income loaning with refinances versus home loans is the borrower now has a proven payment record on the house that can be used as proof of ability to pay.
Stated Income Commercial Loans
The biggest advantage to stated income loans is in the commercial loan sector. This is because the real income potential comes not from what the borrower has, but what the borrower intends to produce with his commercial loan. If the borrower has an idea that generates a million dollars per year, he will not only be willing to pay his commercial loan to get it started, but he is willing to pay at a hefty interest rate for your risk in order to get the project started.
The same logic works for stated income construction loans because the value is coming from what is built, not what the builder has. He very likely doesn’t have the money to make the payments routinely for 30 years, but he will have more than enough when the project sells in order to pay for his loan in full. The bank earns a great interest rate when you consider the fee that was paid as pre paid interest and the very short amount of time the lender had his money at risk.
Some Senators like Chuck Shumer want to make stated income loans illegal. I say let the market decide.